The United States Department of Labor recently released a formal Interpretation explaining how to determine whether a worker is an employee or an independent contractor under Fair Labor Standards Act (“FLSA”). The FLSA is a federal law which sets minimum wage and overtime pay requirements.

The Interpretation was written by David Weil, the Administrator of the DOL’s Wage and Hour Division. He explains that an increasing number of employers are misclassifying employees as independent contractors. As a result, many workers are unfairly denied minimum wage, overtime pay, unemployment insurance and other benefits.

As Mr. Weil indicates, the FLSA defines “employer” extremely broadly. It includes anyone the employer “suffers” or “permits” to work for it. Accordingly, “most workers are employees under the FLSA.”

As the Interpretation recognizes, to determine whether someone is an employee or a contractor under the FLSA, a court should look at the “economic realities” of their relationship. The ultimate question is the extent to which the worker has “economic dependence” on the employer. In making this assessment, courts should consider the following six factors:

1. The extent to which the work performed is an integral part of the employer’s business

The more important the job is to the employer’s business, the more likely the worker is an employee.

2. The extent the worker’s opportunity for profit or loss depends on his/her managerial skill

In contrast to employees, independent contractors typically are able to earn more money by, for example, hiring their own workers, purchasing equipment and materials, advertising, and completing projects more quickly. As a result, unlike employees, contractors often risk losing money on projects and assignments.

3. The relative investments of the employer and the worker

Independent contractors typically make significantly greater financial investments into their businesses, such as purchasing equipment and tools, than employees. But even individuals who make substantial investments toward their work are not necessarily contractors, especially if the employer invests even more toward their work.

4. Whether the work performed requires special skills and initiative

An individual who does not have any special skills generally is not an independent contractor. However, individuals such as electricians, carpenters and construction workers who do have such skills are independent contractors only if they operate independently from the employer’s business.

5. The permanency of the relationship

The fact that a job is expected to be permanent or last indefinitely suggests the worker is an employee, since working for the same employer for a prolonged period ordinarily is inconsistent with independence. However, the fact that a job is short-term or temporary does not necessarily indicate the worker is an independent contractor.

6. The degree of control exercised or retained by the employer

To be independent contractors, individuals must have actual control over “meaningful aspects” of the work they are performing. But, for instance, the mere fact that employees who work from home may have the right to set their own hours and may not have anyone directly supervising their job performance generally is not enough to make them independent contractors.

In a footnote, the Interpretation notes that the Family & Medical Leave Act (“FMLA”) expressly use the FLSA’s definition of “employ.” As a result, it concludes that the same test applies to determine whether an individual is an employee or an independent contractor under the FMLA. The FMLA is a federal law which, among other things, requires employers to allow qualified employees to take up to 12 weeks off from work for (1) their own serious health condition, (2) the serious health condition of their spouse, parent, or child, or (3) pregnancy, adoption, or to bond with a new child.

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